4 Steps to Affordable Housing for Canadians: Reprint from May 2015 Blog

It is close to the end of 2017 and Canadians and people living in the Lower Mainland are worried about the cost of housing. The Federal Government just announced what it called a National Housing Plan, which upon closer inspection is a paper statement allocating billions of dollars to fund a plan that has not yet been formulated. It is always easier to talk about allocating funding years ahead of when it needs to be available as opposed to actually formulating a plan to fix the structural inadequacies of the current system now. My blogpost below was written in May and June 2015 and contains some suggestions to fix some of the problems now, not some time in the future. I am reprinting it here as the suggestions still appear to be relevant and the press continues to canvass "academics" in search of answers, many of which completely avoid the complex issue of income taxation. I hope this gives food for thought.

A few years ago, the bears were on the sidelines predicting the implosion of a huge real estate bubble. Now, not having been successful in that endeavour, they are trying to manufacture one politically. No doubt, we can't have it both ways: retire with a huge cash out for our homes, but be able to afford to help our children buy property in that same expensive market. I doubt that the rally described below will be attended predominantly by property owners. The reply from City Hall, "Let them have condos", will not solve the supply problem if the housing market continues to be open and free to non-residents for investment and/or speculative purposes. Therefore empty properties should be the first target of government and a strategy in that direction will be the most effective impetus to alleviate pricing without hampering foreign or dometic property investment.

I have no problem with condo towers being sold out over a weekend to buyers from anywhere in the world. Allowing that to happen is the most efficient way to increase housing stock in the fastest amount of time. Permitting the property to remain vacant without consequence once built however, is contrary to good housing policy and is a source of friction within our greater community.

The problem seems to be to find a legal and administratively workable solution to enforcement. How will anybody know if a unit is truly vacant or a "friend" ischecking in on it from time to time to circumvent any punitive regulations which target vacant property?

From a legal standpoint, property and civil rights continues to be under provincial jurisdiction, whereas taxation is in the Federal domain. This is part of the problem. A few cities in the country have housing pricing issues. Should federal tax policy be changed across the board to deal with Toronto and Vancouver?

But, we as a community have an issue with non-income tax paying investors cherry picking our real estate. Sure, they pay property tax, but it seems somehow inequitable to us that they can use money earned in a country with far different math when it comes to per capita income taxation to buy property over here. Canada is a bit of a unique country. Every public thing that gets built costs far more per capita due to our thin population density. Highways cost more; airports costs more, shipping costs more etc...So, as a community of contributors, we pay more for common expenses and have less to keep for ourselves. Hence, we can afford to buy less property than people from countries that keep more of their money after taxes. Taking this to its limit, we will one day find that too much of our country is owned by people from elsewhere, unless as a country we apply some kind of equalizer so that non-residents (for income tax purposes) are not better able than Canadians to buy Canadian residential property.

Here are a few possible solutions to this problem to which I invite discussion. Please note, that at this time, I have not taken the liberty of drafting detailed legislation, but rather put these methodoligies out there as discussion points. So far, this topic has garnered one of the highest interest levels of policy posts that I have made. Consider them as discussion points. Even if only some of the ideas were implemented, I believe part of the pressure of increasing property prices would be alleviated.

1. Anybody in Canada who wants to buy a property and who needs a mortgage, goes through a qualification process. Different lenders apply different standards, but for the most part, there is an income test which is pretty much standard from an "A" lending institution for applicants seeking less than 80% loan to value, or conventional mortgages.That formula is often akin to limiting the amount of financing available to payments which will not exceed approximately 40% as a total debt service ratio to monthly income.

I submit that any non-resident applicant who cannot produce a notice of assessment showing Canadian income equal to or greater than the qualifying amount necessary to obtain notional financing on a property sought to be purchased should not be able to purchase residentially zoned, occupancy permitted Canadian real estate. They can invest in its construction, but they cannot either own own it or domestically finance it unless they file sufficient income tax in Canada in a similar way that a Canadian resident would be restricted from doing so for financing purposes. It would be simple to apply an average lending formula to determine qualification.

The above would eliminate the scenario where an offshore wealthy person can deposit the rest of his family in Canada as residents while maintaining international business interests beyond the grasp of Canada's taxation system. The rest of his family may be residents for tax purposes, but if they have not reported sufficient income in Canada for a qualifying period, say 5 years, as a Canadian would have to, then they cannot qualify to own a residence here. We could even consider this for designated municipalities only.

2. Those non-residents who have purchased residential pre-construction property will have 1 year to dispose of same from the date of occupancy permit if they do not qualify for the income tax test above, failing which property taxes will increase to an amount calculated against the assessed value to yield an amount equal to the notional taxes that would be payable on income required to qualify for a mortgage on such a property as in 1 above. This type of property tax should fall under provincial jurisdiction.

3. The principal residence exemption would no longer apply to persons who have not filed the above notional minimum Canadian income tax for a period of no less than 5 continuous years. Hence foreigners who enter Canada, buy a property, build a large house, claim to have lived in it "ordinarilly", and then sell it, will not have any of the gain on such property sheltered from tax. In fact, I would argue that not having each member of the family become Canadian residents would be indicative of the family's intention to view the property purchase not as a capital investment for a lasting and enduring benefit, but as a form of inventory and as "an adventure in the nature of a trade", therby causing call of the gain on its sale to be taxable. But enforcement and collection seems to be the problem here. Often homes are sold, residency is declared as being in Canada and the funds disappear.

Lawyers and notaries acting as the conveyancers could be required to withhold and remit 50% of any gain on the property failing receipt of a letter of confirmation from Canada Revenue Agency, similar to that required by an estate. This would stop the uncontrolled tax leakage from those who abuse the generous tax exemption, designed for Canadian families that live together, but granted to those "newcomers" who split families across international borders and who do not generate income tax at all payable to Canada. It is time we stopped this "tax giveaway" to everyone, and started to view it more as a form of birthright than an absolute right.

4. It is time we recognized that Canadians have come to view their homes as their nest eggs. That being the case, and more often than not, such investment having outpaced those in the stock market, tax deductibility should be an option for interest payments on principal residence home loans for Canadian resident taxpayers, like for RRSP deductions, for up to say, 20% of their taxable income to assist with the goal of home ownership.Why should tax policy favour stock market and fund investments instead of home ownership when each one is arguably as effective as the other and the second seems to be a higher priority for Canadians?

I submit, that some combination of the above 4 methods would substantially affect home ownership in a very positive way. Foreign investors seeking access to Canada are going to have to come up with better ways to invest their funds than to park same into Canadian residential properties (single family homes, that is). I suggest that they be encouraged to invest in job-creating ventures and entrepreurial projects instead, in order to obtain the kind of incentives that they have come to enjoy and which are available from the residential housing market.

Continued in my June 5 2015 post:

In my May 22, 2015 blogpost, the 4th suggestion (I added it a little after the original post) had to do with allowing some portion of resident Canadians' mortgage interest payment to be tax deductible.

Thinking about this a little bit more, and weighing all of the options, I think this No 4 option has some political potential of being more acceptable that some of the others. This is why:

1. It doesn't overtly target foreign investors and give the appearance of Canada "closing" its borders to investment as might some of the others. 2. It focusses on increasing affordability for Canadians who have Canadian earned income and hence by implication pay taxes here. Therefore it is self screening in nature. Foreigners would not likely benefit as they do not often pay income tax here and hence could not deduct interest expenses against their income.3. It could assist in domestic residential debt management policy by restricting the deduction of interest on mortgage values not in excess of a certain percentage of the property's assessed value. Therefore, if the limit was set at loan to value ratios of 65%, any interest payments above that amount would not be deductible. It would motivate Canadians to better manage their debt as compared to what happened in the US where because all of the mortgage interest was tax deductible, people loaded up on debt and had very little equity in their homes. This abetted the housing crisis there.4. On a hypothetical $,1000,000 mortgage (and I am using this number just as an example) at 3% interest the annual interest expense in the first year would be around $19,440 and at around a 40% marginal tax bracket that would yield savings of some $7800 per year, or the equivalent discount equal to the taxpayer's marginal tax rate.

Although this would increase affordability dramatically, it would nevertheless still increase domestic competition and put upward pressure on residential home prices. But at least more Canadians could afford to enter the market and we would be better able to compete for product.

5. No additional enforcement procedures or players need to get involved to manage the process. It is simply an additional form on a taxpayer's income tax return.

6. The proposal can even provide for an offset to the RRSP annual deduction so that while the total deductions between RRSPs and home ownership interest deductability might be the same, at least the taxpayer can elect where to put his own money. This even aligns with the current government's vision of allowing Canadians to manage their own fiinancial affairs as opposed to having it done by a government.

From an administrative workability, jurisdictional and policy standpoints, the above recommendation would be the easiest for the Federal government to undertake on its own and would not need the acquiesence of the provinces or the municipalities.

To clarify though, I am not suggesting the abandonment of the other approaches, especially the enforement and restriction of the principal residence exemption to only Candadian resident taxpayers. It is just that this is the simplest to implement and can be done quickly by the government to respond to Canadians' housing concerns. It is a great first solution to show that they are listening."